David Beckworth has a new post that discusses John Taylor’s praise of Robert Hetzel’s new book:

John Taylor appears to be really close to my view of monetary policy over the past decade: it was too loose in the early-to-mid 2000s and was too tight beginning in 2008. And like all Market Monetarists, he believes a big reason for these failures is that the Fed did not follow a systematic, rules-based approach to monetary policy. We agree and would like it to be a nominal GDP level rule. If Taylor can buy Evan P. Koenig’s argument that the Taylor Rule is just a special case of a nominal GDP level target then he is even closer to Market Monetarism than he realizes.

1. I am glad to see Robert Hetzel’s book is finally out and I strongly recommend that all my readers buy a copy. It has outstanding analysis on both the Great Depression and the Great Recession.

2. I was glad to see that John Taylor likes Hetzel’s book. That suggests my views on monetary policy have not diverged from Taylor’s views as much as I had feared. I recently did a post pointing to a 2008 Taylor article that seemed to suggest money was too easy in 2008. In the new John Taylor post he argues the main problem was the discretionary nature of the policy:

In this regard Scott Sumner recently raised some good questions about the part of my analysis on the crisis, where I wrote that one possible unintended consequence of the Fed’s large unanticipated interest rate cut in early 2008 was the decline in the dollar and associated jump in oil and gasoline prices (which were clearly a factor in accelerating the downturn). There were many discretionary moves during this period, but in the part of my analysis Sumner refers to I was discussing interest rates. Recall that on January 22, 2008 the FOMC cut the federal funds rate by 75 basis points in one day, which was most unusual and certainly unanticipated. It was not on an FOMC meeting day, which made it particularly unusual.

The Fed was apparently concerned about stock market turbulence which was later associated with a large trading loss and panic selling incident caused by a single trader Jérôme Kerviel at Société Générale. I was concerned that such a discretionary move tied to stock prices could have adversely affected the Fed’s credibility regarding the dollar and thereby affect oil prices. It was one of many discretionary moves I wrote about, emphasizing that “It is difficult to assess the full impact of this extra sharp easing, and more research is needed” Given that more than four years have transpired, more research is still needed, and I appreciate Scott Sumner raising the issue. In my view the issue is best viewed as only one part of a massive switch away from rules and toward discretion over a number of years, and, as Hetzel’s emphasizes in his book, this is the kind of monetary policy that generally leads to poor economic performance.

I’ve noticed that when I discuss economic policy with other free market types, it’s easier to get agreement on broad policy rules than day-to-day discretionary decisions. Thus I don’t think the 2004-06 Fed policy was quite as excessive as David Beckworth (or John Taylor) does, but David and I both agree that a policy of roughly 5% NGDP growth, level targeting, would have been the way to go. I don’t want to put words into John Taylor’s mouth, but if I had to guess his differences with us market monetarists is probably not quite as big as one might imagine on the basis of a few comments aimed at recent Fed policy. All three of us favor a explicit policy rule that would (de facto) deliver roughly 2% inflation in the long run, with some ability to soften the effects of real shocks to the economy. We all oppose discretion.

Consider a 4.5% growth rate target for NGDP. It is possible for two people to agree on this policy, and even agree on level targeting, and yet still disagree on whether the Fed should do more right now. Conservatives who favored starting the trend line from current levels of NGDP might oppose further stimulus. Someone advocating going about 1/3 of the way back to the pre-2008 trend line (as I do) might favor some additional stimulus. Someone who favors going all the way back to the pre-2008 trend line (i.e. Christina Romer) might favor a lot of additional stimulus. That was also my view in 2009, but I now think going all the way back would be too disruptive.

In the long run, however, all three of these people would favor policies that were rule-bound, and that would deliver the same long run NGDP growth rates. This is why the differences between liberal and conservative macroeconomists seemed to almost vanish during the Great Moderation; both could live with the fairly stable 5% trend NGDP growth

PS. I just got back from a very enjoyable bloggers conference in Kansas City. People often say Kansas City is a surprisingly nice town, but nonetheless I was surprised how nice it was. Unfortunately I am swamped with work, especially taxes. Please leave lots of angry remarks in the comment section of any and all bloggers who support the 16th amendment. The world would be a better place if the Federal government simply withheld what they thought I owed (as other countries do) and didn’t require me to spend a week filling out all sorts of complicated tax forms. My time would be much better spent pressing for a better monetary policy regime.

(Yes, I finally adopted Turbo-Tax last year, but it helped only slightly.)

but David and I both agree that a policy of roughly 5% NGDP growth, level targeting, would have been the way to go.

Seriously, how can any market monetarist who believes in the magic number of 5% for NGDP, possibly refute someone who believes in 6%? What argument can be given other than the purely subjective and arbitrary “Today there’s more who agree with 5% than with 6%”?

What if market monetarists 50 years from now agree to the magical number of 25% instead?

After a couple of thousand tweets, she got temporarily suspended, and rather than play whack-a-mole, I’m negotiating with twitter on how much the messages need to vary etc when they offend grieving people. I’ve got copyright on her name and online presence so its going to be an ongoing artsy thing.

I mention this because the KC conference proved another way to get Matt to delete the offending post.

The ultra-fun conference hashtag (this one was #econbloggers)

I’m having a page set up to aggregate a crack squad of #iambreitbart fans who can be pinged whenever Matt attends a conference to flood the given hashtag channel with virulent commentary abut Matt, his dead mom, whatever floats their boat.

The riddle is using social media without an actual attack on Slate advertisers.

The fun thing about KC was the video camera was pointed directly at Matt when I smacked at him on twitter, so I could see him physically tense up. Ezra sitting there next to him, a nice laugh.

Frankly, if I were him I’d have deleted the tweet long ago. After Breitbart fans puked all over his book reviews at Amazon. Arrington calls it showing your belly. Mistakes get made in real time published existence.

Based on history, YOU have to admit that Woolsey’s 3% NGDPLT is very close to zero inflation.

But then you’d only be moving the arbitrariness one step backwards. Why 0% price inflation rather than 1% or 2% or -1%?

4.5% is some inflatikon.

Why is “some” inflation a good thing? In truth it isn’t. Investors who expected a gradual annual price deflation of -2%, say, would just price current factors of production correspondingly lower. Investors after all consider price spreads, not price aggregates. That is what they take into account when investing. If with an expected future price of 110 units of money they can price current factors of production at 100 units of money, then with an expected future price of 108 units of money, they can certainly price current factors of production for correspondingly less, say 98 units of money.

6% and we’re starting to print money precisely so we don’t have to ratchet down the screws on govt. policy.

That doesn’t follow.

These aren’t #’s pulled from ass, they are guesses based on 70+ years of data.

The numbers you believe are not pulled from your ass, are based on numbers pulled out of your ass, such as 0% price inflation instead of 1% price inflation.

And they are made by people who are not idealists and they are to be judged by you on this question: is what they are suggesting BETTER than current policy?

Not idealists? Don’t you mean ideologists?

Is what they are suggesting better than what we have now? Of course. Any monetary policy that gets closer to a free market gold standard is a step in the right direction. However, and this is paramount, the only way it would make sense for me to support would be if and only if it was only advocated as a temporary step towards more individual ownership, and not as a permanent policy. The problem is that NGDP targeting is intended as a permanent policy.

My conviction is that NGDP targeting is in practise actually a temporary policy, but not for the reason market monetarists might accept. My conviction is that NGDP targeting invariably and inevitably results in an exponentially rising aggregate money stock, and thus eventual hyperinflation. This is because NGDP targeting suffers from the same flaw as price targeting or interest rate targeting, namely, it fails to appreciate the very important nature of money as a tool of economic calculation at the individual level, which includes money for holding and not just its spending attribute.

A policy of a monopolist printing money to make aggregate prices or spending levels rise at an arbitrary rate each year violates the individual economic calculation basis of money. It therefore distorts and hampers the only regulating system a division of labor society has in making sure heterogeneous resources and labor are sustainably allocated cross sectionally and temporally.

Market monetarists don’t understand how the “natural” free market works, so they can’t understand, or refuse to understand, the damage that NGDP targeting foists upon society. They incorrectly believe that a healthy free market requires a permanent “stable” spending aggregate, when in reality a healthy free market requires a permanent “stable” private property right in money production. Anything less, even if it is superior to what we have now, is doomed to fail.

It is like a human slavery scientist trying to convince an anti-slave emancipator that beating slaves in a different way, and making slaves do different things, since it is superior to the current system of slavery, is somehow not going to do any damage to people.

You believe that Sumner et al are just secretly bringing about the end of the Fed via changing their inflation policy. But Sumner never addresses any weaknesses of NGDP targeting. He only ever defends and protects it from ALL criticism. That is not someone who believes NGDP is only superior. That is someone who believes NGDP is the permanent end game.

There is no real discussion hereabouts on a counter-plan, it is either status quo or NGDPLT.

False dichotomy.

YES, I’d love to not be an idealist and scream for a digital version of a gold standard. not going to happen yet.

Not going to happen because there are too many people like you who don’t ruthlessly defend and protect a free market monetary system the way you defend and protect NGDP targeting.

You seem to believe that there are forces in social life that ideas cannot alter, as if humans are on some predetermined path of fate, of history, that we cannot change no matter what. I am not an epistemological historicist. You seem to be one. You seem to believe that ideas cannot change, that ideas cannot alter future social life away from where it would have gone if you just sat back and let others determine you life.

You say “not going to happen” like you’re some Nostradamus who has mystical cosmic insight into the inner workings of history. Hegel and Marx much?

But here now the discussion is not that, it is only current policy or Scott’s.

False. There are more than just those two.

Once you admit his is better, it gives you and actual strategy to get to what you really want.

You can’t know what’s better unless you have an actual goal that you’re working towards. I don’t see Sumner blogging about the optimal money. I don’t see you defending or protecting a free market in money in as much detail as you do with NGDP.

In short, you’re just capitulating because you don’t appreciate the power that ideas has on society.

Just look at how fast the idea of NGDP targeting is spreading amongst economists. Sumner knows that with enough economists calling fro NGDP, the Fed will do it. Well, doesn’t that frigging PROVE that with enough economists calling for an end to the Fed, the Fed will shut its doors and we’ll have what you claim to want?

I find you to be rather capitulative and short sighted. If Sumner and other market monetarists, and other economists in general, spent as much time and energy talking about, publishing, and blogging about a free market in money production, then do you really believe that the Fed will still exist? Bollocks. The Fed only exists precisely because of opportunists like “free market” market monetarists.

What market monetarists have to understand is that not all nominally equal NGDP levels are the same in terms of their implications. They have this simple minded belief that perpetual 5% nominal spending growth is divorced from the real economy and real individual people. In reality, the increasingly distorted economy that NGDP targeting generates, carries with it an increasing tendency of people to want to hold higher cash relative to spending. This is because a given level of spending becomes insufficient to “sustain” the increasingly distorted economy.

If the Fed were to have targeted NGDP from 2008 on, and inflated enough to prevent it from falling, then they would have had to bring about huge increases in M3/M2 money stocks. That is the only way that an economy with a hugely distorted housing market could have staved off correction that would have seen a decline in NGDP. Since the Fed didn’t print that much money, NGDP was not sustained, and individuals were better able to correct the housing errors. But, of course, they weren’t fully able, because the Fed still inflated and still brought interest rates down. So from the standard of zero intervention, fewer corrections were made, and from the standard of NGDP targeting, more corrections were able to be made.

Market monetarists fail to comprehend that getting people in the aggregate to spend 5% more each year, carries with it a continuously distorted real economy that requires an acceleration in money stock inflation in order to sustain a constant 5% aggregate spending growth.

I’ll make it simple for you. Imagine you have two investment opportunities, one that you expect to lose 5% and the other you expect to lose 10%, given current prices of factors of production. How much money do I need to print and give to you before you will invest anything in either project? $10,000? $1 million? $1 billion? $10 billion?

Now imagine that current prices of factors of production fell. Now the two projects will have an expected gain of 5% and 10% respectively. Now how much money do I need to print and give to you before you will invest?

Man, the Fed should blow the doors off of the printing plant, and print money until the plates melt. Then start issuing scrip.

Crickey, what is all this feeble “Oh, maybe we should steel ourselves and target 5 percent GDP….”

Dudes! People have been unemployed for years. We are so far below trend GDP that weak is beginning to look like normal.

Inflation is not AIDS. It is a minor irritant.

Real growth is the goal of monetary policy, not slavish and peevish fixation on a nominal and subjective index of inflation.

2 percent inflation? When people are going years without a job? How about 5 percent? That horrid 5 percent was the rate when the WSJ editorialized that Volcker was being too tough and Reaganauts were angling to move the tall guy over to the World Bank.

And now we get diarrhea over 4 percent?

Dudes,take some Pepto-Bismal and get tough.

Can we get serious about growth? How we overshoot on the side of growth for a change? Would some boom times kill us?

How about we monetize about $2 trillion in debt in next 20 months, and see where we stand?

[…] I read a draft of Robert Hetzel´s new book – The Great Recession: Failure of Markets or Policy about 8 or 9 months ago. The deal was that I could not quote from it until it became public. That´s now happened. And it´s interesting that John Taylor was the first to announce it and quote from it. David Beckworth did a post and so did Scott Sumner. […]

Sticky wages are a real problem. Sorry, deal with it. Government can and does make it a bigger problem, but even without government interference people do not accept falling wage rates and then unemployment ensues. Until we get robots that can do everything for us, unemployment means less output. Less output means recession.

Come back to reality Major Freedom. Around the world, free market policies are under attack because everyone is associating the most recent crash with the failures of the market. They are wrong, but it doesn’t make the fact that they believe it any more dangerous. NGDP targeting is the fastest way to get everyone back to work and restore the economy to some level of prosperity where people will not be pushing for the statist policies that they are pushing for right now.

Would I like a free market currency regime? Of course. But I am more concerned that we have a free labor market. A free energy market. A free financial market. A free land use market. And it’s not really looking good for us right now in any of those I just mentioned. Maybe, if we make some progress on those, then eventually we might get around to the idea that governments should give up their 5,000 year monopoly on issuing currency.

“You believe that Sumner et al are just secretly bringing about the end of the Fed via changing their inflation policy.”

Yes I “believe” Scott is secret about it. secret may even be the wrong word, he may know and love it, but people are weird and he’s a luddite (so he’s naive about the new world) but still not want to highlight it. He’s been negotiating college professor life for a long, long time without a blog. Think about that the web happened 1998, Sumner showed up 10 years later.

but I KNOW he KNOWS this ends the Fed – at least most of the Fed as you and me and Ron Paul think of it.

small side note:

“You say “not going to happen” like you’re some Nostradamus who has mystical cosmic insight into the inner workings of history. Hegel and Marx much?”

Darth Vader Marxist by those who don’t know me. But there’s a difference between beliefs and assumptions vs. LOGIC AND RATIONAL GAME PLAY. I prefer conservative thinking, but I’m just as turned on by trying to figure out how liberals ought to play for their greatest outcome.

When I say not going to happen it is because if I could think of a better way to hack out a libertarian end game sooner than it is already going to happen (and it does happen) I’d say it would happen.

—-

Lastly pls everyone, note how I move the ball down the field?

You know i hate to toot my own horn, but TOOT! TOOT!

Getting agreed points agreed to, so the discussion can be more narrowly focused…

MF says, “Is what they are suggesting better than what we have now? Of course. Any monetary policy that gets closer to a free market gold standard is a step in the right direction. However, and this is paramount, the only way it would make sense for me to support would be if and only if it was only advocated as a temporary step towards more individual ownership, and not as a permanent policy. The problem is that NGDP targeting is intended as a permanent policy.”

OK:

1. NGDPLT it is better than we have now.
2. Scott, you don’t have to promise it will be temporary, but you COULD more freely admit your plans are far tighter money and smaller government BY FORCE OF YOUR POLICY over the long term than we have had before.

The fact is Scott, DeKrugamn KNOWS now what you are up to, you’ve gotten as much out of them as positive quotes we can hold against them later as we’re going to get.

Major_Freedom: What Liberal Roman said. Your counsel of “perfection” is a classic example of the perfect being the enemy of the good.

Moreover, the optimal inflation rate for countries can vary significantly (pdf): so 0% inflation is not even likely to be “perfect”. But then, it is often the case that the “perfect” policy is far from so.

Even given the demographic complications, given the choice between the BoJ’s apparent 0% inflation target and the RBA’s explicit target of 2-3% on average over the business cycle I will go with what clearly works better. Particularly when one compares their level of public debt to ours (220% of GDP in 2010 to 21% of GDP).

1. The government makes prices stickier downward by A. engaging in an inflationary policy that makes people accustomed to expecting rising prices despite the fact that the new monetary conditions should see prices falling, and B. interventions in the form of price floors (minimum wage), welfare, and pro-union legislation (forcing employers to bargain with politically empowered unions “in good faith”). People will not choose no job and starve to death, over choosing to work at a lower wage rate. Prices are not so sticky in the free market so as to justify the state monopolizing the money supply and printing money to reward people for being stubborn.

Major_Freedom: (1) Wages would be sticky downwards even if none of the above interventions occurred. But, given said interventions are not going to be abolished tomorrow, even if they are responsible, monetary policy has to deal with the institutional framework as it is, not as one might like it to be.

(2) At 0-2% inflation, no it is not. (Any notion that any number above 0% risks imminent hyperinflation is just silly: 0% is also just a number.)

Moreover, 2% inflation does not encourage anti-market policies anywhere near as much as 10% unemployment does.

“You believe that Sumner et al are just secretly bringing about the end of the Fed via changing their inflation policy.”

Yes I “believe” Scott is secret about it. secret may even be the wrong word, he may know and love it, but people are weird and he’s a luddite (so he’s naive about the new world) but still not want to highlight it. He’s been negotiating college professor life for a long, long time without a blog. Think about that the web happened 1998, Sumner showed up 10 years later.

Believe based on what evidence?

but I KNOW he KNOWS this ends the Fed – at least most of the Fed as you and me and Ron Paul think of it.

How?

When I say not going to happen it is because if I could think of a better way to hack out a libertarian end game sooner than it is already going to happen (and it does happen) I’d say it would happen.

It can’t happen unless people think and act on it.

MF says, “Is what they are suggesting better than what we have now? Of course. Any monetary policy that gets closer to a free market gold standard is a step in the right direction. However, and this is paramount, the only way it would make sense for me to support would be if and only if it was only advocated as a temporary step towards more individual ownership, and not as a permanent policy. The problem is that NGDP targeting is intended as a permanent policy.”

1. NGDPLT it is better than we have now.

2. Scott, you don’t have to promise it will be temporary, but you COULD more freely admit your plans are far tighter money and smaller government BY FORCE OF YOUR POLICY over the long term than we have had before.

The fact is Scott, DeKrugamn KNOWS now what you are up to, you’ve gotten as much out of them as positive quotes we can hold against them later as we’re going to get.

It’s time to actually win the Ron Paul crowd over.

“End the Fed” and “Let’s assume the Fed exists and design a permanent Fed policy that is “closer” to the free market than what we have now” will not mix. The Ron Paul crowd is, so far, incorruptible.

But from a real world standard of private property and free trade, prices are maximally sticky.

But, given said interventions are not going to be abolished tomorrow, even if they are responsible, monetary policy has to deal with the institutional framework as it is, not as one might like it to be.

They won’t be abolished tomorrow precisely because of people like you who say it won’t be abolished tomorrow, as if you’re all a bunch of Nostradamuses.

(2) At 0-2% inflation, no it is not. (Any notion that any number above 0% risks imminent hyperinflation is just silly: 0% is also just a number.)

At any arbitrary rate of inflation or nominal spending, yes it is. Any notion that constant spending is somehow inconsistent with eventual hyperinflation is just silly.

Moreover, 2% inflation does not encourage anti-market policies anywhere near as much as 10% unemployment does.

Yes, it does, because it is precisely the forcing of 2% price inflation by engaging in monetary inflation that generates the 10% unemployment in the first place.

Major_Freedom: But from a real world standard of private property and free trade, prices are maximally sticky. What does that even mean?

They won’t be abolished tomorrow precisely because of people like you who say it won’t be abolished tomorrow, as if you’re all a bunch of Nostradamuses. Actually, in a previous job I was an active and public advocate of labour market liberalisation. But that is nothing to do with monetary policy given the existing institutional framework, which is the question here.

At any arbitrary rate of inflation or nominal spending, yes it is. Any notion that constant spending is somehow inconsistent with eventual hyperinflation is just silly. Hyperinflation episodes are actually rare. The US, for example, has not had one since the Civil War. Keeping to the trend growth of NGDP clearly is perfectly compatible with not having hyperinflation.

But I understand that in the “Austrian”/gold bug/etc universe, hyperinflation is like the ever-sharpening crisis of capitalism in Marxism–an article of faith that the future is on one’s side, no matter how unhelpful past and present are.

Yes, it does, because it is precisely the forcing of 2% price inflation by engaging in monetary inflation that generates the 10% unemployment in the first place. Utterly false, as even cursory knowledge of economic history would make you aware.

So if there is a sudden drop in house prices, the bonds backing those mortgages drop, and debtors buy back their mortgage at a discount. Those who are way over their heads or were just speculators, still end up in foreclosure, but those at the margin who actually want to stay in their homes stay there.

“End the Fed” and “Let’s assume the Fed exists and design a permanent Fed policy that is “closer” to the free market than what we have now” will not mix. The Ron Paul crowd is, so far, incorruptible.

see Ron Paul treatment of Mitt Romney (Mankiw)

Steve,

1) Address nominal wage stickiness:
Create government / business partnerships to establish workshare programs. Make it easy to reduce worker hours in lieu of wage cuts or employment cuts.

Provide a Guaranteed Income via Paypal of $240 per week to all unemployed who want to work.

Auction their labor weeks in Ebay at $1 per hour (starting bid $40), with no taxes, meaningful employee regs.

Employees can take any bid their are offered, but they keep 50% of bid + their $240.

If we are going to talk about wage stickiness being real then we must want to END wage stickiness in a liquidation based system.

Negation of Ideology

We’ve known how to liquidate houses here FAST but we just haven’t done it.

It starts right now. First bulk sales are occurring from F&F FHA. I’m helping out in a bid right now for 500 homes. In many instances the people foreclosed on become the new renters.

My thinking is that until now the focus has been propping up the banks, not saving the foreclosed. MERS definitely screwed things up. But once that was out of way, the liquidation is getting really serious fast.

Please leave lots of angry remarks in the comment section of any and all bloggers who support the 16th amendment. The world would be a better place if the Federal government simply withheld what they thought I owed (as other countries do) and didn’t require me to spend a week filling out all sorts of complicated tax forms. My time would be much better spent pressing for a better monetary policy regime.

Take it back Scott. The world would not be better if the Government withheld what they thought you owned (which you select on a W-4 form anyway, which is simple). The world would be a much better place if the government did not bother taking a share of our earnings before we got to spend it, and instead was content taking a share of what we spent. Even better if the government is frugal enough to be funded on small sales/land taxes.

You missed the point of “addressing nominal debt stickiness” Allowing creditors to seize and liquidate in response to collateral declines is the problem, not the solution. In a 0% inflation world, you get more debt exchanges, collective action clauses, and principal haircuts. The laws are changed to provide clear triggering mechanisms for these, one of which is a sharp decline in collateral prices.

Most people who advocate 0% inflation do so not because it provides a “freer” system (they tell us that but they don’t really mean it). They advocate 0% inflation because they want a free lunch for creditors while ignoring the systemic implications.

I favor 0% inflation and I don’t see this as providing a “free lunch” to creditors.

I don’t really understand your argument, but it certainly seems absurd. We need to have 2% increase in the prices of consumer goods and services (rather than 3%, 1%, or zero) because of rules about colletaral and haircuts?

I have never worried once about collateral and while I did get a haircut last week, my barber charged me $18.

Now, I realize that there are poeple who worry about collateral and sometimes there are “haircuts” taken on the value of that collateral.

Why should I, or any of the other 280 million Americans who are like me have to put up with a monetary system based on prices rises 2% each year for the convenience of finanical market traders?

I agree that speeding up the foreclosure process is in many cases better for both the creditor and the debtor.

Steve –

I think if the government refused to enforce recourse loans we’d be a long way to your solution. Once a debtor surrenders the collateral the loan should be legally considered satisfied in full. A lender has the right to demand any size down payment, plus any length of term they want, so they should take a loss if they make a loan that exceeds the value of the asset. If they’re not willing to take the risk of losing money on an unproductive loan, what justification do they have in earning interest on a productive loan?

““End the Fed” and “Let’s assume the Fed exists and design a permanent Fed policy that is “closer” to the free market than what we have now” will not mix. The Ron Paul crowd is, so far, incorruptible.”

see Ron Paul treatment of Mitt Romney (Mankiw)

Well, I did say the Ron Paul crowd, not Ron Paul, and to address your point, Ron Paul said:

“I like Mitt Romney as a person. I think he’s a dignified person. But I have no common ground on economics. He doesn’t worry about the Federal Reserve. He doesn’t worry about foreign policy. He doesn’t talk about civil liberties, so I would have a hard time to expect him to ever invite me to campaign with him.”

Major, you could learn a lot from Murphy. He’s actually a likeable guy who gets along well with those he disagrees with.

Look in the mirror.

Lorenzo from Oz:

“But from a real world standard of private property and free trade, prices are maximally sticky.”

What does that even mean?

I actually corrected that part right after, to read “maximally flexible.”

What does that mean? It means prices in a free market are as flexible as they can possibly get in accordance with natural human limitations, such as not having omniscience, and having to learn about new information that takes time.

“They won’t be abolished tomorrow precisely because of people like you who say it won’t be abolished tomorrow, as if you’re all a bunch of Nostradamuses.”

Actually, in a previous job I was an active and public advocate of labour market liberalisation. But that is nothing to do with monetary policy given the existing institutional framework, which is the question here.

It has everything to do with monetary policy because monetary policy is just another form of government intervention that makes prices more rigid. Inflation targeting gets people accustomed to rising prices, and so when new monetary conditions actually call for falling prices, people are psychologically less willing to accept lower prices.

In a free market, there is ZERO incentive for people to refuse lower prices for the goods and services they sell, and starve to death, when the new economic conditions require falling prices to clear the market. Wage earners who have no welfare from the state, no minimum wage law banning them from working, and no inflation from a central bank, they have all the incentive in the world to accept a lower wage rate that employers are calling for.

It’s your advocacy of central banking that is what led me to conclude that it is people like you who make the price system less efficient.

“At any arbitrary rate of inflation or nominal spending, yes it is. Any notion that constant spending is somehow inconsistent with eventual hyperinflation is just silly.”

Hyperinflation episodes are actually rare. The US, for example, has not had one since the Civil War. Keeping to the trend growth of NGDP clearly is perfectly compatible with not having hyperinflation.

Depressions like the Great Depression were rare before the Great Depression. History in economic data does not disprove what we can ascertain via cause and effect analysis.

But I understand that in the “Austrian”/gold bug/etc universe, hyperinflation is like the ever-sharpening crisis of capitalism in Marxism–an article of faith that the future is on one’s side, no matter how unhelpful past and present are.

Herp derp.

“Yes, it does, because it is precisely the forcing of 2% price inflation by engaging in monetary inflation that generates the 10% unemployment in the first place.”

Utterly false, as even cursory knowledge of economic history would make you aware.

[…] to Market Monetarism and NGDP targeting. Scott Sumner followed up Beckworth’s post with an optimistic one of his own, more or less welcoming Taylor to ranks of Market Monetarists. However, Marcus Nunes in his comment […]

Scott,
Have you noticed the debate running between Steve Keen and Krugman? And the commentary run by Nick Rowe and many others? Apparently we so wore out poor Nold ick we sent him to his beddy-bye tonight (sleep-tight, good knight).

It was fun. I think I know a lot more about Post-Keynesians, not that I agree with them any more.

Actually what disturbs me is that RBCers, Post-Keynesians, MMTers, and other heterodox economists seem to be leaning on Schumpeter. I have no quarrel with Schumpeter specifically but look at his descendents and tell me there isn’t something wrong with them?

MF, I have lots of posts explaining why I picked 5%, feel free to go back and read them.

Morgan, Don’t use my blog to bash Yglesias’s mom; if you have to carry through with your obsession do it somewhere else.

Steve, Good point, tight money policies have historically led to anti-freedom policies.

Lorenzo, That’s a good one.

Brian, Thanks, but that’s not my cup of tea. He implies that Bernanke thinks we are in a liquidity trap, whereas Bernanke most certainly does not think that.

Cthorm, OK, I take it back. Go with the consumption tax.

Larry, I have heard that at least three intro textbooks are planning on adding market monetarism.

Mark, Yes, both Krugman and Rowe had some excellent posts, and I especially liked your comment over at Rowe’s blog–it was outstanding. How come you don’t leave such brilliant comments over here anymore?

>They advocate 0% inflation because they want a free lunch for creditors while ignoring the systemic implications.

This could be a possibility – but more likely this will happen because they feel somehow that 0% inflation will clean the way – or even force – to implement additional reform in other areas like labour regulation, contract enforcement and so on while “printing money” could offer an alternate way to delay such reform. Or to not implement them at all.

At the end is the socio-political goal which matters in this case. Or – if you prefer – the “hope part” of a theory.

>But I understand that in the “Austrian”/gold bug/etc universe, hyperinflation is like the ever-sharpening crisis of capitalism in Marxism–an article of faith that the future is on one’s side, no matter how unhelpful past and present are

Exactely. Being born and educated in an ex-communist country this was exactely my feeling when I had first time contact with Austrian writers.

Isn’t 0% cutting it a bit close to deflationary? It doesn’t leave much wiggle room for shocks, and my concern would be nominal debt contracts providing a “free lunch” to creditors more often when trying to divine perfection at the Fed.

Major_Freedom:

My opinion is NGDP level targeting is the least bad alternative to the arbitrary discretion the Fed has now. If the Fed can’t decide to discipline itself and implement this on its own, congress needs to impose it, and put some teeth in the mandate so that these jokers who do things like spring arbitrary changes in policy preference in the middle of a crisis, leaving everyone to try to guess what they are doing will get flushed out of the system and not be allowed to come back. They have no business managing municipal garbage collection, let alone being in a position to have such a huge impact on the financial health of everyone who is transacting in dollars.

I agree with you that free markets need to be allowed to rule, and that should not exclude money. But I disagree with ravaging the Fed first and foremost, other than the imposition of NGDP level targeting, because I do not agree that every price distortion originates from the Fed, or that all disinflation/deflation that arises from adjustments in monetary policy is more beneficial than not. In fact, I find that line of reasoning rather uncivil, to put it politely, in a world that utilizes credit, generally well.

From my point of view, the better approach would be to get us on a path to freeing markets, and unwinding the interventions from Federal agencies first to get us into general supply side deflation that comes from lower costs of doing business, improved competitiveness, the elimination of barriers to competition, improved access to raw materials etc… Then we can talk about unwinding the money monopoly; and when we do it, it has to be a multi-year effort that is well planned and communicated beforehand so people don’t get caught with their assets hanging out.

“Austrian economics does not enable predictions to be made. It only provides a set of irrefutable economic principles that act as constraints.”

That was one of Milton Friedman’s critiques of Austrian economics. No predictive capacity, which limits their usefulness.

And on the wage stickiness issue, it is caused moreso by human numerical loss aversion. It’s human nature that we do not want to see our wages go down. To say that prices can be perfectly flexible is the same as saying humans can abandon all greed.

Greed is a part of being human, it’s not perfect, but real and natural. So is wage stickiness.

Major_Freedom: so when new monetary conditions actually call for falling prices, people are psychologically less willing to accept lower prices. Inflation (and deflation) are always and everywhere a monetary phenomenon, so you have causation backwards. Also, anyone familiar with the actual history of labour market reforms and interventions knows that monetary policy is way, way down the list of relevant factors.

In a free market, there is ZERO incentive for people to refuse lower prices for the goods and services they sell, and starve to death, when the new economic conditions require falling prices to clear the market. Wage earners who have no welfare from the state, no minimum wage law banning them from working, and no inflation from a central bank, they have all the incentive in the world to accept a lower wage rate that employers are calling for. Not true. Money is the medium of account, so that (1) people have existing obligations to meet, and (2) contracts are set in the medium of account and breaching contracts poisons employer-employee relations is enough to generate wage stickiness. Yes, some interventions increase wage stickiness, and having a large public sector increases it even more, but neither creates it.

Besides which, your free market nirvana is almost certainly not going to happen and is absolutely not going to happen in the next X months: which still leaves the question of what should be monetary policy in the current institutional framework. If you are not interested in that question, fine: but do not waste people’s time who are.

Depressions like the Great Depression were rare before the Great Depression. They happened in the C19th (the 1890s Depression was nearly as severe), they have not happened since. Clearly, something has improved. But since such Depressions are deflationary episodes, they have nothing to do with my comment, which is about the lack of hyperinflationary episodes.

No, it’s not utterly false. It’s utterly true. You’re unaware of economics. OK, I get that you are a dogmatic true believer uninterested in evidence; since your “principles” are so correct, evidence is superfluous (i.e. you are a dogmatic true believer) but elementary comparison of the inflation and unemployment rate in the US with Australia demonstrates that 2% inflation is not what causes 10% unemployment. One of the things we do know is that deflation is worse than hyperinflation and unexpected disinflation is worse than anticipated inflation and one of the ways those things are worse is they are much more likely to cause unemployment.

Also, I understand Austrian economics just fine. (I even understand “internet” Austrian economics.) My problem is it fails to grapple with the evidence and no amount of dogmatic assertion gets around that problem.

To take a simple example: the concept of ‘malinvestment’. The notion that you can have a notion of malinvestment independent of the general level of economic activity is just silly. Whether an investment is a good one or not will generally depend on the level of economic activity. One of the disastrous effects of the “liquidationist” to approach to busts is that it actually creates “malinvestment”, by turning investments which were viable into no-longer-viable investments.

Morgan,
The debate was primarily at Worthwhile Canadian Initiative, but Krugman and Keen have been tit for tat for over a week now. I would have enjoyed it if you threw in your two cents worth but I think everyone is exhuasted (even Krugman) at this point.

Scott,
Why didn’t you contribute? You could have made your own points much better than I.

My opinion is NGDP level targeting is the least bad alternative to the arbitrary discretion the Fed has now.

Would your opinion also be that murder and rape targeting is the least bad alternative to the arbitrary discretion criminals have now?

If the Fed can’t decide to discipline itself and implement this on its own, congress needs to impose it, and put some teeth in the mandate so that these jokers who do things like spring arbitrary changes in policy preference in the middle of a crisis, leaving everyone to try to guess what they are doing will get flushed out of the system and not be allowed to come back. They have no business managing municipal garbage collection, let alone being in a position to have such a huge impact on the financial health of everyone who is transacting in dollars.

The Fed pays Congress. Congress makes the rules in favor of those who pay them.

I agree with you that free markets need to be allowed to rule, and that should not exclude money. But I disagree with ravaging the Fed first and foremost, other than the imposition of NGDP level targeting, because I do not agree that every price distortion originates from the Fed, or that all disinflation/deflation that arises from adjustments in monetary policy is more beneficial than not.

It is not required that one believes ALL price distortions originate from the Fed, before one can legitimately call for its abolition.

In fact, I find that line of reasoning rather uncivil, to put it politely, in a world that utilizes credit, generally well.

Uncivil? That’s rich. Those who support or apologize for legalized counterfeiters are uncivil. Those who support or apologize for private property rights and free markets are civil.

From my point of view, the better approach would be to get us on a path to freeing markets, and unwinding the interventions from Federal agencies first to get us into general supply side deflation that comes from lower costs of doing business, improved competitiveness, the elimination of barriers to competition, improved access to raw materials etc… Then we can talk about unwinding the money monopoly; and when we do it, it has to be a multi-year effort that is well planned and communicated beforehand so people don’t get caught with their assets hanging out.

NGDP targeting carries with it no inherent call for temporariness.

In short, your response is just the same old moral and intellectual capitulations and talking points that tends to come out of the market monetarist world.

Jason Odegaard:

“Austrian economics does not enable predictions to be made. It only provides a set of irrefutable economic principles that act as constraints.”

That was one of Milton Friedman’s critiques of Austrian economics. No predictive capacity, which limits their usefulness.

That comment presumes that human choices can indeed be prediction based on constant causal operative factors.

Austrians reject that belief. They hold that there are no such constancies in human action, and if there were, we could not even coherently regard ourselves as past causally determined anyway.

Critiques can only be valid when they are backed with a valid argument. Friedman’s critique is really more of a belief based on a fallacy.

The top minds at the Fed, the PhD economists from top schools, couldn’t predict the 2008 collapse EVEN AS LATE AS SEPTEMBER 2008. Shouldn’t that tell you that maybe, perhaps, the Austrians are right?

And on the wage stickiness issue, it is caused moreso by human numerical loss aversion. It’s human nature that we do not want to see our wages go down. To say that prices can be perfectly flexible is the same as saying humans can abandon all greed.

Hunger trumps loss aversion.

Greed is a part of being human, it’s not perfect, but real and natural. So is wage stickiness.

Sticky from what standard? Supernatural world of instant price changes whenever supply and demand change?

Lorenzo from Oz:

“Major_Freedom: so when new monetary conditions actually call for falling prices, people are psychologically less willing to accept lower prices.”

Inflation (and deflation) are always and everywhere a monetary phenomenon, so you have causation backwards.

You’re confused as usual. For one thing, the quote is only inflation, not deflation. Second, a sustained, general increase in prices is a monetary phenomenon. But that doesn’t mean that prices can’t fall apart from monetary considerations. Productivity can rise, and all else equal that will make prices fall. That’s not monetary. People can wait a longer time before spending out of their incomes, and all else equal that will make prices fall. Third, in a correction period, falling prices is NOT a monetary phenomenon. It is a phenomenon that is brought about by individuals choosing to reduce their spending, caused of course by prior inflation and the distortions it caused.

Also, anyone familiar with the actual history of labour market reforms and interventions knows that monetary policy is way, way down the list of relevant factors.

Red herring. Nobody is denying there are other factors. The point you have to address is that monetary factors so in fact play a role in making prices stickier than they otherwise would be.

“In a free market, there is ZERO incentive for people to refuse lower prices for the goods and services they sell, and starve to death, when the new economic conditions require falling prices to clear the market. Wage earners who have no welfare from the state, no minimum wage law banning them from working, and no inflation from a central bank, they have all the incentive in the world to accept a lower wage rate that employers are calling for.”

Not true.

It’s most certainly true.

Money is the medium of account, so that (1) people have existing obligations to meet, and (2) contracts are set in the medium of account and breaching contracts poisons employer-employee relations is enough to generate wage stickiness.

Existing contracts can be renegotiated. No “breaching” is necessary. If an employee is faced with lower wages or zero wages, then in the absence of minimum wage laws, welfare, and pro-union legislation, wages will indeed fall. You can whine about “poisoning”, but that is a weak argument that justifies inflation.

Yes, some interventions increase wage stickiness, and having a large public sector increases it even more, but neither creates it.

Prices are maximally flexible in a free market. There is nothing else to say. If you want to complain about prices not instantly adjusting according to some standard not of this world, then that doesn’t not justify state intervention in the form of inflation.

Besides which, your free market nirvana is almost certainly not going to happen and is absolutely not going to happen in the next X months: which still leaves the question of what should be monetary policy in the current institutional framework. If you are not interested in that question, fine: but do not waste people’s time who are.

Brilliant prediction. Something is not going to happen for X months. Wow.

“Depressions like the Great Depression were rare before the Great Depression.”

They happened in the C19th (the 1890s Depression was nearly as severe), they have not happened since. Clearly, something has improved.

No, it has not improved. First, the corrections of the late 19th century were brought about by movements away from a 100% reserve gold standard. Second, the Great Depression and the current recession occurred after the Fed was created, and both were WORSE than the 19th century by a long shot. Just look at the real rates of growth back then and what happened to real wages. It’s not even close.

But since such Depressions are deflationary episodes, they have nothing to do with my comment, which is about the lack of hyperinflationary episodes.

OK, I get that you are a dogmatic true believer uninterested in evidence; since your “principles” are so correct, evidence is superfluous (i.e. you are a dogmatic true believer) but elementary comparison of the inflation and unemployment rate in the US with Australia demonstrates that 2% inflation is not what causes 10% unemployment.

You are misinterpreting the evidence. In your zeal to monopolize a single permitted explanation for historical data, and then claiming that this is “the” data “speaking to you”, in reality what you are doing is not deferring to “evidence” whereas the “dogmatists” are allegedly not. No, what you are doing is introducing a fallacious and very dogmatic theory about how to interpret economic data.

You need to realize that data does not speak for itself. No data by itself can elucidate a theory to be true.

The data does not demonstrate either that inflation causes unemployment or that inflation does not cause unemployment. The data alone cannot tell you which of these two theories is correct. Your error is that you are taking the fallacious theory “If inflation causes unemployment, then there should be a constant relation between inflation and employment, such that we can derive a constancy formula of the form “Unemployment = Alpha*Inflation + epsilon”.

But these types of formulas are not the foundation for confirming or falsifying the theory that inflation generates unemployment.

The theory that inflation causes unemployment is derived from economic principles, which is then used to interpret history. Your theory is internally false, so whether it is confirmed or falsified is irrelevant.

If only you dogmatic believers understood what economic evidence really means, and what form it takes. You’re using sandbox methods.

One of the things we do know is that deflation is worse than hyperinflation and unexpected disinflation is worse than anticipated inflation and one of the ways those things are worse is they are much more likely to cause unemployment.

Also, I understand Austrian economics just fine. (I even understand “internet” Austrian economics.) My problem is it fails to grapple with the evidence and no amount of dogmatic assertion gets around that problem.

Austrians don’t reject “evidence.” They reject the notion that historical evidence can expose constancy relations in human actions. This is a subtle point that is obviously going over your head.

I know how you internet anti-Austrians think. You’re a dime a dozen. You all seem to refer to the same list of tripe talking points.

To take a simple example: the concept of ‘malinvestment’. The notion that you can have a notion of malinvestment independent of the general level of economic activity is just silly.

I notice you have a habit of responding to arguments with nothing but “it’s absurd.” You rarely follow up on it, and this time you did, but you said:

Whether an investment is a good one or not will generally depend on the level of economic activity.

This makes no sense. “Economic activity” IS determining whether investments are good or bad in the sphere of economic calculation, and exchange.

No, whether an investment is good or bad depends on economic calculation at the individual level, not some vague abstract concept “economic activity”, as if “activity” can take place totally divorced from investment!

One of the disastrous effects of the “liquidationist” to approach to busts is that it actually creates “malinvestment”, by turning investments which were viable into no-longer-viable investments.

You can’t know that unless you defer and respect the market process of economic calculation.

Liquidationism is not “disastrous.” If a project is viable, then it won’t have to be liquidated. Liquidations are a process of correcting bad investments. To call liquidations a causal factor in creating malinvestments, displays a deep and profound ignorance.

Viable investments aren’t liquidated. Liquidations are what occurs with non-viable investments. Yes, that means you have to stop believing yourself to being a socialist economic dictator. Yes, I know that’s very hard for you to do.

Major_Freedom:
(1) The cases you describe are not monetary conditions.
(2) If other factors are more important than monetary policy in price stickiness (as they are) then monetary policy still has to deal with price stickiness.
(3) Replacing a contract before it is due to end so as to pay folk less does bad things to employer-employee relationships. Merely asserting that in some free market situation “by definition” there will be no sticky prices is an article of dogmatic faith, not evidence-grounded analysis.
(4) Your ignorance of C19th economic history apparently knows no bounds.
(5) Were you a Marxist in a previous life? You seem to have the rhetoric of protecting theory from contrary evidence down pat. Including the ascribing to critics positions they do not hold and did not assert.
(6) If you think that the viability of investment is independent of general economic conditions, you might try and explain why the business profile of Port-au-Prince differs so much from that of Sacramento.

Friedman’s critique was that Austrian economics provides no predictive power. And you seem to deny predictive power, as human beings are utterly unpredictable. So how does studying Austrian economics provide any benefit? Why waste our time? In the end, you are left with no actions to take based on your knowledge.

They actually are. Changed cash balances of friends of the Fed is changed monetary conditions.

(2) If other factors are more important than monetary policy in price stickiness (as they are) then monetary policy still has to deal with price stickiness.

But monetary policy makes prices more sticky. It is misleading to say monetary policy has to “deal” with price stickiness, the same way it would be misleading to say that a thief has to “deal with” theft.

(3) Replacing a contract before it is due to end so as to pay folk less does bad things to employer-employee relationships.

Psychology, not economics. Wage earners who are presented with a choice of lower wage or zero wage, is a tough pill to swallow, but it is an optimal solution.

Merely asserting that in some free market situation “by definition” there will be no sticky prices is an article of dogmatic faith, not evidence-grounded analysis.

I didn’t say there will be no sticky prices. I said prices will be maximally flexible in a free market of pricing.

You still haven’t shown this accusation to be true. You just keep repeating it.

(5) Were you a Marxist in a previous life? You seem to have the rhetoric of protecting theory from contrary evidence down pat. Including the ascribing to critics positions they do not hold and did not assert.

Were you a murderer in your previous life? Hey cool, anyone can spew rhetoric devoid of substance.

(6) If you think that the viability of investment is independent of general economic conditions, you might try and explain why the business profile of Port-au-Prince differs so much from that of Sacramento.

I didn’t say viability of investments are independent of general economic conditions. I reject the notion that “aggregate spending” is a general economic condition. If one individual spends less money, while all others maintain their spending, then “aggregate spending” falls, but only in your ignorant world would you consider that to be a change in general economic conditions.

Jason Odegaard

Maybe you can help me out, as what you suggest seems odd.

Friedman’s critique was that Austrian economics provides no predictive power. And you seem to deny predictive power, as human beings are utterly unpredictable. So how does studying Austrian economics provide any benefit?

It provides us with irrefutable economic principles that constrain economic forecasts by rejecting impossible outcomes.

If you need a science that allows you to forecast economic phenomena, you won’t find it. Economic forecasting is the job of entrepreneurs, who risk their money, not scientists, who read books.

Why waste our time? In the end, you are left with no actions to take based on your knowledge.

On the contrary, it leaves us with many actions to take based on this knowledge. It tells us that central banking should be abolished, given the end of eradicating the business cycle. It tells us why certain things take place, so as to guide our actions going forward.

[…] to Taylor by David Glasner, Marcus Nunes at Historinhas, or Scott Sumner focus on how a central bank in a fiat-money system can do "better policy." A better […]

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Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.